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Chinese state-owned banks seen selling dollars to shore up yuan

Mon, Oct 24, 2016 - 5:38 PM

China's yuan exchange rate stabilised after plumbing fresh six-year lows on Monday, as large state-owned banks sold dollars in an apparent effort to slow the decline in the currency's value against the dollar.

PHOTO: BLOOMBERG

[SHANGHAI] China's yuan exchange rate stabilised after plumbing fresh six-year lows on Monday, as large state-owned banks sold dollars in an apparent effort to slow the decline in the currency's value against the dollar.

The yuan has fallen about 1.5 per cent since the end of September, a slide driven partly by a resurgent dollar and worries about slowing economic growth.

Sentiment toward the yuan has also been hurt by growing market confidence in the likelihood of a US interest rate rise in December with a recent Reuters poll showing the largest bearish positions in the currency since late July.

Spot yuan was trading around 6.7709 per dollar as of 0706 GMT, hitting a low of 6.7770 per dollar at one point in morning trade, compared with Friday's 6.7655 late session close.

"Dollar demand was very strong today. And dollar purchases by individual residents also went up today," said a trader at a Chinese bank in Shanghai, adding that state banks sold dollars as a result to prop up the Chinese currency.

Some traders suspect that state-owned banks occasionally sell dollars on behalf of the central bank to keep the yuan from sliding too quickly, while others believe big banks trade on their own behalf.

The Chinese bank trader and a Shanghai-based trader at a foreign bank speculated that the People's Bank of China might want to stabilise the yuan around its current level.

Before the market opened on Monday, the central bank fixed the midpoint at 6.769, easier than the previous fix of 6.7558 and its weakest since September 2010. Traders said Monday's fixing came in weaker than their models had suggested, and that accelerated the yuan's falls in the morning.

"The market consensus is that the yuan would fall to 6.8 per dollar by the end of this year, which is just 200 pips from the current level," said another trader at a Chinese bank.

She said some investors joined the big state banks and sold their long positions in dollars, as they turned cautious amid the dollar's rapid ascent and wanted to lock in profits. "The yuan could possibly be traded to that level (6.8) in a day."

The dollar, meanwhile, hovered near a nine-month high, buoyed by expectations the US Federal Reserve would raise interest rates in December.

The global dollar index rose at one point to 98.846, its loftiest since Feb 3, and up from 98.695 previously.

The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan's value based on the market's trade-weighted basket stood at 94.30 on Friday, down 0.4 per cent from the previous week.

In line with onshore yuan, its offshore counterpart also slipped to a fresh six-year low against the dollar in morning trade. As of 0706 GMT, offshore yuan was trading 0.09 per cent weaker than the onshore spot at 6.7773 per dollar.

Ken Cheung, Asian FX strategist at Mizhuho Bank Ltd in Hong Kong, wrote in a note on Monday that the central bank would be unlikely to allow the yuan to breach 6.83 per dollar level, at which is regarded as "the pegged level of USD/CNH during the global financial crisis from mid-2008 to mid-2010."